Article from Ministry of Finance

About the Swedish fiscal policy framework

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The fiscal policy framework is an instrument to ensure that fiscal policy is sustainable and transparent in the long term. Certain principles are regulated by law, while others are based on the practice that has gradually developed since the 1990s. In June 2016, a cross-party agreement was concluded on changes to the fiscal policy framework. In April 2018, the Government presented a written communication to the Riksdag containing a cohesive description of the framework. The new fiscal policy framework has applied since fiscal year 2019.

The fiscal policy framework consists of several targets and principles for fiscal policy, and methods to monitor and evaluate these and ensure transparency. The framework consists of the following elements:

  • budget policy targets (surplus target, debt anchor, expenditure ceiling, balanced local government budgets),
  • a disciplined central government budget process,
  • external monitoring of fiscal policy, and
  • openness and clarity.

Details of the framework are described in the communication Fiscal policy framework, Govt Communication 2017/18:207

Budget policy targets

The budget policy targets for fiscal policy are a key element of the fiscal policy framework. These comprise a surplus target for the entire general government sector, an expenditure ceiling for central government, the requirement for the local government sector to maintain balanced budgets, and a debt anchor for the consolidated gross debt ('Maastricht debt').

Surplus target for the entire general government sector

Under the Budget Act, the Government must propose a net lending target for the general government sector. In 2007, the Riksdag established that the surplus target for net lending is to amount to 1 per cent of GDP on average over a business cycle. From fiscal year 2019, this target will change to one third of a per cent of GDP on average over a business cycle.

Monitoring of the surplus target focuses on a comparison of the surplus target and structural net lending. Structural net lending is an estimation of how large net lending would be if it was not affected by the economic situation or one-off effects in fiscal policy.

Debt anchor

A debt anchor has been introduced in the new framework. The debt anchor is a benchmark for the size of the consolidated gross debt in the medium term. It is the consolidated debt for the entire general government sector (central government, municipalities and county councils), and is also known as the Maastricht debt. The debt anchor for consolidated gross debt is set at 35 per cent of GDP.

Each year, the Government must give an account of the development of the consolidated gross debt, which is to be presented in the Spring Fiscal Policy Bill. If the consolidated gross debt deviates by more than 5 per cent of GDP, the Government must present a communication to the Riksdag explaining the cause of the deviation and how it will be managed. This communication must be presented at the same time as the Spring Fiscal Policy Bill is presented to the Riksdag.

Central government expenditure ceiling

Under the Budget Act, the Government is obliged in its Budget Bill to propose an expenditure ceiling for central government and old-age pension system expenditures for the third year ahead. The Riksdag then sets the ceiling. Accordingly, the expenditure ceiling is set three years in advance. Determining a ceiling ensures clarity in the frameworks available for expenditures and tax levies in order to achieve the surplus target.

With a change in government, which involves a reorientation of economic policy, or in the event of a crisis with far-reaching economic consequences, the Government can propose a change to the set level of the expenditure ceiling. The Riksdag then takes a decision on the change.

Requirement for the local government sector to maintain balanced budgets

To strengthen the budget process at local level, a balanced budget requirement for the local government sector has been in place since 2000. This requirement means that every municipality and county council must plan their budget to achieve balance. The balance requirement specifies the lowest acceptable level of net surplus or deficit. Since 1992, local governments have been required to exercise good financial management in their activities. They are to adopt guidelines for good financial management.

Disciplined budget process

Another key element of the fiscal policy framework is the disciplined central government budget process. Budget work is based on a top-down perspective in which different expenditures are set against each other and any increases in expenditure are considered in the context of pre-determined fiscal space defined by the expenditure ceiling and the surplus target. This process helps ensure that the budget proposals do not add up to a higher total amount than is compatible with sustainable fiscal policy.

The guiding principle in the work on the budget is that any expenditure increases in an area must be covered by expenditure cuts in the same area. Another important principle is that the Government's draft budget must include all income and expenditures, as well as other payments that affect the borrowing needs of the central government (the principle of completeness).

External monitoring

Effective external monitoring of fiscal policy at both international and national level is important to the long-term sustainability of fiscal policy. At international level, fiscal policy is primarily monitored by various EU bodies, as well as by the OECD and the International Monetary Fund. Several government agencies are responsible for monitoring fiscal policy at national level, including the Swedish Fiscal Policy Council, the National Institute of Economic Research and the Swedish National Financial Management Authority.

The Swedish National Financial Management Authority and the National Institute of Economic Research independently assess macroeconomic and public sector financial development, and present recommendations on the focus of fiscal policy.

The Swedish Fiscal Policy Council has a special responsibility for analysing how well the Government achieves its budget policy targets and whether the fiscal policy is sustainable in the long term.

The National Audit Office is an authority under the Riksdag tasked with auditing central government operations. Within four months of receiving a performance audit report from the National Audit Office, the Government must submit a communication to the Riksdag describing the measures taken or intended to be taken by the Government in response to the report.

Openness and clarity

To ensure that the fiscal policy framework governs policy and that monitoring fiscal policy is possible, it is important for fiscal policy reporting to be transparent and comprehensive. Citizens must be able to have insight into fiscal policy.

There are rules concerning how the Government's fiscal bills are to be formulated. These rules are found in the Instrument of Government, the Riksdag Act and the Budget Act. A cohesive description of these rules is contained in the written communication 'Fiscal policy framework'.